Global Tax Insights
Understanding fixed-Term Contracts in ChinaJanuary 29, 2014
What you need to know about contracts in China and how they impact the employer-employee relationship.
Written in conjunction with KLR China affiliate Sabrina Zhang, National Tax Partner, Dezan Shira & Associates
Firms that are considering hiring people in China need to be familiar with the specifics of fixed-term contracts. Just like any contract that is created between a worker and a person who is working in the Asian nation, certain requirements - which are outlined in Article 17 of the Labor Law Contract - must be followed.
Fixed-term contract basics
The vast majority of employees hired in the private sector in China are given fixed-term contracts. Generally the contracts are for full-time positions (although they do not have to be). The key point to consider for employers is what length of contract to offer each staff member.
A fixed-term contract can be of any length. However, the length of fixed-term contract offered to an employee has a major effect on the subsequent employer-employee relationship:
- A fixed-term contract can only be renewed once. On the occasion of the second renewal the contract effectively becomes an open-term contract
- The length of the fixed-term contract will determine the maximum length of the probation period that the company can offer to the employee
These written agreements between individuals and employers need to contain basic information, including the name of the person and the amount that he or she will be paid. In addition to having these minimum requirements, fixed-term contracts must specify a period of time. An employee hired with a fixed-term contract enters into a binding agreement to fulfill work functions over an established period of time.
Until the contract is actually over, a company that has one of these agreements with an individual will have to keep in mind that terminating an employment can be a challenge and that once the individual stops working for the employer, severance must be paid.
It is also important to note that within one month of hiring a new employee in China, companies are required by law to provide them with a contract. If they fail to do so, they are liable to pay the individual additional compensation. However, there are completely different implications for firms that hire people in China but do not give them a fixed-term contract in the first year. In the event that a company takes on a worker in China and takes longer than one year to supply such an agreement, an open-term contract will automatically be created.
Inclusion of probationary periods
One important aspect of fixed-term contracts is that they can be designed to contain a probationary period, if the employer is interested in including such a caveat. These time frames, which help to companies to evaluate new workers, vary in length based on the schedule that is used for the contract.
For example, if the agreement has a fixed term of more than three years, it can include a probationary period of up to six months. In the event that the contract has a time frame of between one to three years, it can only give workers up to two months worth of probation. If the agreement is for less than 12 months, then the individual can be given up to one month, during which time, his employment is up for increased scrutiny by the company.
During a probation period, employers can pay 80 percent of the full salary as stipulated in the employment contract (no lower than minimum wage benchmark) and more easily terminate employees than under fixed-term contracts.
In contrast, an employee still within their probation period can resign from the company after giving just three days’ notice. Employers may want to consider this point if they offer employees a particularly long probation period (for instance, six months). It is not advisable to give a large amount of responsibility to an employee who is able to resign at such short notice.
Terminating fixed-term contracts
Companies looking to terminate an individual’s fixed-term contact can only do under specific conditions. For such a separation of employment to happen, there must either be an agreement between both parties, or the individual must be unable to perform his job duties because of injury. If there has been substantial alteration to the employment situation, an employer may also use this to terminate fixed-term contracts.
In cases where the employee has a long time remaining on a contract, it is recommended that the employer gather as much material as possible concerning the shortcomings of the employee concerned before taking any action. During a dispute the arbitration panel will take into account the evidence provided by both sides concerning job performance before making a decision on how much compensation to award to the employee.
In addition, firms looking to end their employment agreements in this manner must keep in mind that to do so, they need to get in touch with any labor organizations representing the individual, and provide both the union and the person with 30 days notice. Once the individual is terminated, he must be paid severance, and the amount of compensation that must be provided to the person is based on the time he spent working at the employer. The only way for the organization employing the individual to get out of doing this is if the individual has managed to violate the regulations established by the company, or alternatively the government of the nation or local jurisdiction.
Download our latest Resource Center Article: Q&A Interview with KLR and Dezan Shira on the advantages and disadvantages of doing business in China.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.